A study on the effect of supply chain management practices on organizational performance with the mediating role of innovation in SMEs

This paper investigates the relationship between supply chain management practices and organizational performance with the mediating role of innovation. Data were collected from 207 small and medium enterprises (SMEs) in Punjab, Pakistan.

Uncertain Supply Chain Management (2019) 179–190 Contents lists available at GrowingScience Uncertain Supply Chain Management homepage: www.GrowingScience.com/uscm A study on the effect of supply chain management practices on organizational performance with the mediating role of innovation in SMEs Muhammad Khuram Khalila, Rashid Khalilb and Sajjad Nawaz Khanb* a PhD Scholar, Faculty of Environmental Management, Prince of Songkla University, Thailand PhD Scholar, Islamic Business School University Utara Malaysia b CHRONICLE Article history: Received September 9, 2018 Accepted October 12 2018 Available online October 17 2018 Keywords: SCMP Innovation Organizational performance ABSTRACT This paper investigates the relationship between supply chain management practices and organizational performance with the mediating role of innovation Data were collected from 207 small and medium enterprises (SMEs) in Punjab, Pakistan PLS-SEM was used to analyze the proposed hypotheses Findings reveal that strategic partnership with supplier and level of information sharing had no influence on organizational performance In addition, quality of information sharing, internal supply chain process, and lean practices had significant influence on organizational performance Moreover, all five practices of supply chain management had significant and positive influence on innovation Meanwhile, innovation significantly and positively mediated the relationship between supply chain management five practices and organizational performance The findings of this study will help managers of SMEs enhance their performance © 2019 by the authors; licensee Growing Science, Canada Introduction Supply chain management practices (SCMP) was gaining popularity in early 1990s when whole the world was facing with massive competition in the world market in delivering goods and services at less cost (Li et al., 2006) Some of the prior researchers reveal that business managers, academicians, and consultants focus the concept of supply chain management (SCM) (Choon Tan et al., 2002; Croom et al., 2000; Van Hoek, 1998) Various organizations think to recognize SCM in enhancing performance of organizations (Jones, 1998) According to Li et al (2006), SCM refers to unambiguously identifies the tactical nature of harmonization among organization trading partners and also enlighten the twofold objective of SCM: enhance individual organization performance and enhance whole organizational performance (OP) The main challenge for organizations is learn what supply chain practices they follow to enhance both organizational and operational performance Many prior researchers have used SCMP to improve OP (Azmi et al., 2018; Chavez et al., 2013; Gimenez et al., 2012; Liu et al., 2013; Ramanathan, 2012; Sukati et al., 2012; Janaki et al., 2018) Other studies have inconclusive results and need to study further SCMP and OP (Ketokivi & Schroeder, 2004; Pilkington & Fitzgerald, 2006) and * Corresponding author E-mail address: sajjadkhan_nice@yahoo.com (S.N Khan)   © 2019 by the authors; licensee Growing Science, Canada doi: 10.5267/j.uscm.2018.10.007         180 some other have examined the influence of practices on monetary performance only (Venkatraman & Ramanujam, 1986) In the current study, we focus on both financial as well as non-financial performance SMEs plays an significant role in the developing of an economy (Wijetunge, 2017) Nowadays, SMEs play a vital role in economic growth, poverty reduction, innovation, and employment generation (Stokes et al., 2010) In developing countries especially, SMEs play a key role to contribute rural economy, poverty reduction, employment creation, entrepreneurship development, exports growth, and manufacturing industry (Stokes et al., 2010; Arora et al., 2017) Hence, SMEs are considered critical and backbone for developing countries (Prasad, 2004) Prior studies have ignored the mediating effect of innovation between SCMP and OP of SMEs Hence, the current research is trying to fill this gap Literature Review 2.1 Organizational performance (OP) Organizational performance (OP) is referred to phenomena of how well enterprises obtain their desired goals There are various studies available in the past on OP but still, there is no universal definition that can be used to measure OP Some of the researchers use financial performance to measure OP Some others use non-financial performance to measure the performance of an organization In the current study, we are using financial and market factors to measure OP (Yamin et al., 1999) 2.2 Supply Chain Management Practices (SCMP) According to Li et al (2006), SCMP is referred to a combination of activities undertaken within the organizations to encourage the efficient management of their supply chain There are some researchers that use various SCMP For instance, continuous process flow, supplier partnership, cycle time density, share information regarding technology, and outsourcing (Donlon, 1996) Choon Tan et al (2002), introduced elements of SCMP; namely supply chain integration, customer service management, information sharing, geographical propinquity, supply chain characteristics, and just-in-time capability Chen and Paulraj (2004), identified communication, supplier based reduction, cross-functional teams, long-range association, and supplier involvement in measuring supplier and buyer relationship Tan et al (1998) identified customer relationship, quality, and purchasing to represent SCMP Hence, literature depicts SCMP in terms of different perspectives but at the end one universal objective that is to enhance OP   2.2.1 Strategic partnership with suppliers (SPS)  SSP is referred to the long-range association with organizations and their suppliers (Li et al., 2006) Some of the prior researchers elucidate that SPS is designed to leverage the operational as well as strategic capabilities of employee participating corporations to facilitate them in attaining significant onward advantages (Monczka et al., 1998; Noble, 1997; Stuart, 1997) Moreover, deliberate partnership highlights direct, long-range relationship and promotes shared planning as well as efforts regarding problem-solving (Gunasekaran et al., 2001) SPS allows organizations to function more efficiently with more significant suppliers that are ready to divide responsibility for product success (Li et al., 2006) Some of the prior studies revealed that SPS had a significant and positive influence on OP (Li et al., 2006; Wijetunge, 2017) Moreover, SPS plays an important role in innovation and there is a study that elucidated that SPS has a positive influence on innovation (Maalouf, 2018) The following hypotheses are proposed for the current study: H1: SPS has a positive influence on OP H2: SPS has a positive influence on innovation H12: Innovation significantly mediates the relationship between SPS and OP M K Khalil et al / Uncertain Supply Chain Management (2019) 181   2.2.2 Level of information sharing Sharing of information consists of two elements such as quality and quantity; and both elements are significant for supply chain management practices and they are used as exogenous constructs in prior studies on supply chain management (Moberg et al., 2002; Monczka et al., 1998) Moreover, level of information (quantity element) means to the extent to which vital and proprietary information are transferred to organization supply chain partner (Monczka et al., 1998) Within an organization shared information can differ from the strategic level to the tactical level as well as from logistics movements to market and information related customers (Mentzer et al., 2000) Various researchers recommended that information sharing with other parties in the supply chain could become a source for organizational performance (Jones, 1998; Novack et al., 1995) Some of the prior studies elucidated that the LIS had a positive influence on organizational performance (Li et al., 2006; Wijetunge, 2017) Meanwhile, the level of information sharing has a positive influence on innovation (Didonet & Díaz, 2012) The following hypotheses are proposed for the current study: H3: LIS has a positive influence on OP H4: LIS has a positive influence on innovation H13: Innovation mediates significantly the relationship between a LIS and OP 2.2.3 Quality of information sharing (QIS) QIS consists timeliness, accuracy, credibility, adequacy, as final credibility of the information communicated (Moberg et al., 2002; Monczka et al., 1998) Moreover, information sharing is momentous, and the importance of its influence on supply chain management that what, when, and with whom information is shared (Chizzo, 1998; Holmberg, 2000) Therefore, organizations need to outlook their important information as organization asset and make sure that information communicated with the least delay and distortion (Li et al., 2006) There is a positive influence of the QIS on OP (Li et al., 2006) Moreover, the QIS is also important for innovation and authors elucidated that it had a positive influence on innovation (Didonet & Díaz, 2012) The following hypotheses are proposed for the current study: H5: QIS has a positive influence on OP H6: QIS has a positive influence on innovation H14: Innovation mediates the relationship between the QIS and OP 2.2.4 Internal supply chain process (ISCP) ISCP also known as postponement is referred to the practice of going ahead one or more than one operations such as making, sourcing, and delivering to a much afterward point in supply chain management (Johnson & Davis, 1998; Naylor et al., 1999; Van Hoek et al., 1999) One of the authors reveals that there is a need to develop postponement strategy such as examining how many steps organizations want to postpone and which steps they want to postpone (Beamon, 1998) The benefit of the postponement for organizations is that organizations have spare time changing the needs of customer and modification of the demand function (Waller et al., 2000) ISCP has a positive influence on organizational performance (Wijetunge, 2017) Moreover, the ISCP has a positive influence on innovation (Didonet & Díaz, 2012) The following hypotheses are proposed for the current study: H7: ISCP has a positive influence on OP H8: ISCP has a positive influence on innovation H15: Innovation significantly mediates the relationship between ISCP and OP   182 2.2.5 Lean practice Lean practice is referred to a process of eliminating waste time as well as resources in the production process (Wijetunge, 2017) Moreover, a lean practice can be considered a value, an ethos, a philosophy, a management concept, a work culture, and a methodology (Wilson & Roy, 2009) Nowadays, lean practice means a management approaches that develop all the processes within the organization at every level According to Lewis (2000), the lean practice facilitates in removing all waste, stop shortages, minimize lead time, enhance stock turnover, and make sure customer satisfaction The lean practice has a positive influence on organizational performance (Wijetunge, 2017) Moreover, the lean practice has a positive influence on innovation (Maalouf, 2018) The following hypotheses are proposed for the current study:   H9: The lean practice has a positive influence on OP H10: The lean practice has a positive influence on innovation H16: Innovation significantly mediates the relationship between lean practice and OP   2.2.6 Innovation The term innovation plays a significant character in enhancing the quality and performance of an organization (Mone et al., 1998) It refers to the organizational efforts that give the advantage to the organization in long-range (Maalouf, 2018) One of the prior studies reveals that organizations maintain their strong positions in the existing market due to permanent investment in innovation and innovation must be executed in business process as well as in technology (Pisano, 2015) Despite this, innovation is an important element for enhancing organizational performance but various organizations fail to perform well even due to innovation because they not know exact guidelines that how to use that technology and due to lack of formal rules and procedures (Maalouf, 2018) The following hypotheses are proposed for the current study:   H11: Innovation has a positive influence on OP Supply Chain Management Practices Strategic Partnership   with Suppliers Level of Information   Sharing Quality of Information   Sharing Innovation Organizational Performance Internal Supply Chain   Process   Lean Practices Fig Theoretical Framework Methodology The theoretical model of this study consists of seven variables and all these variables are measured by adapting the questionnaire from some of the prior studies since their reliability as well as validity had 183 M K Khalil et al / Uncertain Supply Chain Management (2019)   been established 5-Likert scales is used that has a range within (strongly disagree) to (strongly agree) SCMP e.g SPS consists of items, LIS consists of items, QIS consists of items, ISCP consists of items, and lean practices consists of items adapted from Li et al (2006), innovation consists of items and adapted from Panayides and Lun (2009), and OP is adapted from Li et al (2006) 4.1 Data collection For current research, data were collected from SMEs that works in Punjab, Pakistan 275 questionnaires were distributed among owners of SMEs and only 217 questionnaires received back and 10 questionnaires exclude due to missing values Hence, 207 were questionnaires used for the analysis 4.2 Statistical analysis results In this paper, we have employed a Partial Least Square (PLS-SEM) approach to examine the theoretical model Some of the prior researchers proved that PLS-SEM approach is suitable for both research models such as simple and complex; also there is no need to perform normality test with subtleness (Bamgbade et al., 2015; Hair Jr et al., 2014) In addition, this approach gives better results of estimation to establish construct validities as compared to another approach such as CBC-SEM (Afthanorhan, 2013; Hair Jr et al., 2014) There is a need of two models in PLS-SME like measurement as well as structural model In the current study, we use both of these models 4.3 Measurement model According to Hair Jr et al (2013), in the running measurement model in PLS tool we ascertain three things First, content validity, second, convergent validity, and the final one is discriminant validity 4.3.1 Content Validity Table Factor loading and cross loadings Variable Strategic partnership with suppliers Level of information sharing Quality of information sharing Internal supply chain process Lean practices Innovation Organizational performance Items SPS1 SPS2 SPS3 SPS4 SPS5 LIS2 LIS3 LIS4 LIS5 QIS2 QIS3 QIS4 QIS5 ISCP1 ISCP2 ISCP3 LP1 LP2 LP3 INV1 INV2 INV3 OP2 OP3 OP4 OP5 OP6 SPS 0.901 0.909 0.820 0.867 0.867 0.104 0.090 0.082 0.057 0.428 0.312 0.145 0.238 0.110 0.202 0.450 0.459 0.488 0.660 0.433 0.365 0.518 0.244 0.196 0.214 0.201 0.242 LIS 0.010 0.188 0.049 0.117 0.059 0.904 0.872 0.820 0.881 0.044 0.069 0.116 0.037 0.062 0.030 0.200 0.012 0.074 0.001 0.226 0.257 0.182 0.010 0.188 0.049 0.117 0.059 QIS 0.455 0.315 0.415 0.426 0.417 0.071 0.101 0.091 0.112 0.729 0.752 0.690 0.720 0.457 0.446 0.453 0.160 0.172 0.280 0.407 0.538 0.391 0.455 0.315 0.415 0.426 0.417 ISCP 0.399 0.407 0.447 0.459 0.426 0.135 0.114 0.044 0.141 0.184 0.196 0.192 0.189 0.826 0.876 0.807 0.035 0.142 0.231 0.670 0.538 0.457 0.399 0.407 0.447 0.459 0.426 LP 0.089 0.040 0.135 0.059 0.055 0.039 0.009 0.026 0.048 0.281 0.333 0.022 0.212 0.007 0.018 0.367 0.805 0.890 0.884 0.344 0.308 0.443 0.089 0.040 0.135 0.059 0.055 INV 0.477 0.479 0.420 0.444 0.425 0.236 0.223 0.168 0.253 0.227 0.361 0.452 0.314 0.336 0.376 0.796 0.270 0.363 0.444 0.902 0.832 0.828 0.477 0.479 0.420 0.444 0.425 OP 0.244 0.196 0.214 0.201 0.242 0.112 0.053 0.025 0.102 0.214 0.180 0.561 0.157 0.475 0.486 0.306 0.062 0.092 0.068 0.356 0.390 0.564 0.901 0.909 0.820 0.867 0.867 Some studies reveal that content validity is calculated by using cross-loading and it refers to that the value of the measured variable should be higher than other study variables in the same rows as well as columns (Chin, 1998b; Hair Jr, 2010) as shown in Table 184 Fig Measurement Model Table Convergent Validity Variables Items Strategic partnership with suppliers SPS1 SPS2 SPS3 SPS4 SPS5 LIS2 LIS3 LIS4 LIS5 QIS2 QIS3 QIS4 QIS5 ISCP1 ISCP2 ISCP3 LP1 LP2 LP3 INV1 INV2 INV3 SCP2 SCP3 SCP4 SCP5 SCP6 Level of information sharing Quality of information sharing Internal supply chain process Lean practices Innovation OP Factor Loadings 0.901 0.909 0.820 0.867 0.867 0.904 0.872 0.820 0.881 0.729 0.752 0.690 0.720 0.826 0.876 0.807 0.805 0.890 0.884 0.902 0.832 0.828 0.901 0.909 0.820 0.867 0.867 R2 AVE CR 0.670 0.909 Cronbach Alpha 0.874 Rho_A 0.756 0.925 0.893 0.915 0.523 0.814 0.731 0.740 0.700 0.875 0.792 0.811 0.741 0.895 0.829 0.867 0.730 0.890 0.815 0.589 0.816 0.763 0.941 0.922 0.361 0.923 0.900 Table shows that factor loadings, CR, and AVE fulfill the standardized criterion (Hair Jr et al., 2013) Factor loadings should be greater than 0.50, AVE values also must be greater than 0.50, and CR value should be higher than 0.60 The value of Cronbach’s alpha must be higher than 0.60 as suggested by Fornell and Larcker (1981) Finally, the values of Rho_A demonstrate that all items were reliable for further analysis Hence, the current study fulfills the requirements of convergent validity Table demonstrates that the current study data fulfills the discriminant validity criterion as suggested by Fornell and Larcker (1981) that above the value of diagonal must be greater than off-diagonal elements in same rows as well as columns Moreover, the current study fulfills the required criteria of HeterotraitMonotrait Ratio (HTMT) that recommends Hair Jr et al (2013) (See Table 4) 185 M K Khalil et al / Uncertain Supply Chain Management (2019)   Table Discriminant validity (Fornell-Larcker) Variable SPS LIS QIS ISCP LP INV SCP SPS 0.818 0.123 0.355 0.336 0.636 0.516 0.252 LIS QIS ISCP LP INV SCP 0.870 0.107 0.132 0.026 0.258 0.090 0.723 0.543 0.246 0.519 0.466 0.837 0.175 0.648 0.490 0.861 0.430 0.086 0.855 0.515 0.873 SCP Table Heterotrait-Monotrait Ratio (HTMT) Variable SPS LIS QIS ISCP LP INV SCP SPS LIS QIS ISCP LP INV 0.148 0.484 0.364 0.713 0.593 0.276 0.118 0.141 0.056 0.298 0.105 0.544 0.373 0.615 0.454 0.208 0.747 0.589 0.503 0.099 0.590 4.4 The Structural Model and Hypotheses Testing Now ascertain the direct associations of exogenous variables such as the SPS, LIS, ISCP, and QIS, lean practices, and innovation on the endogenous variable that is OP Fig demonstrates whether or not the beta values and t-value in confirming hypotheses are accepted or not Fig Structural Model In this study, there are eleven hypotheses, that have direct relationships and out of eleven hypotheses only two hypotheses were not accepted For example, SPS has insignificant influence on OP (β=0.064, t-value=0.937, p>0.05) and the hypothesis H1 is supported Moreover, a SPS has a positive impact on innovation (β=0.147, t-value=2.361, p0.05) and the third hypotheses H3 is not supported LIS has a positive impact on innovation (β=0.170, t-value=2.937, p